Indians were shopping for gold on all auspicious occasions, despite the fact that there may be no requirement of gold considering the price appreciation in the future. In view of that, the authorities of India have been issuing a Sovereign Gold Bond Issue wherein you will invest money on gold in grams, get interest every 6 months, and also get an equal quantity of gold on maturity. This is as good as investing in physical gold, but getting interest every 6 months in addition.

Sovereign gold bonds or SBGs are gold bonds issued through the Reserve Bank of India (RBI) on behalf of the Government of India. The gold in this bond is sold on a per-unit basis such that each unit derives its value from the underlying one gram gold with 999 purity. The main purpose of the scheme is to reduce the demand for physical gold and shift a part of the gold imported every year for investment purposes, into financial savings through Gold Bonds.

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What is a Sovereign gold bond?

SGBs are government securities, denominated in grams of gold. This scheme was released by the Government of India in 2015. Bonds are considered as a substitute for holding physical gold. Investors must pay the issue price in cash and the bond can be redeemed in cash at maturity. RBI issues bonds on behalf of the government. Investors will receive the ongoing market value at the time of redemption, in addition to interest.

Point of focus

• Gold bonds can be bought instead of physical gold.
• These bonds will carry an interest rate of 2.5% per annum, payable every one and a half years.
• The Sovereign Gold Bond issue price is decided on the basis of the preceding 3-day average rate of 999 purity gold issued by the Indian Bullion and Jewelers Association Ltd.
• Sovereign Gold Bond Scheme has a holding of 8 years. A person can withdraw from these bonds after 5 years from the date of subscription at interest rates.
• These Sovereign Gold Bonds are issued in denominations of 1 gram of gold and in multiples of 1 gram.
• The minimum investment is equal to 1 gram of gold.
• One can buy a maximum of 4 kgs in a financial year, i.e. in the period from April to March.
• You can get loans against bonds from banks as collateral.
• The buy and sell price of the bond will be the prevailing market price of gold.
• If the value of gold increases, the bond value of gold also increases. It is similar to owning gold in the form of gold coins and bullion.

 How SGBs Work?

• SGBs are issued by RBI in different phases during the financial year. These securities are made available through banks, brokers, post offices, and online platforms. To promote buying SGB online, a discount of INR 50 per gram is given to investors who purchase digitally.
• It is important to notice that RBI brings a new range of SGBs available within the market throughout the year. So, if you miss the final announced announcement, you can always wait for the next issue announcement.
• Investors should purchase bonds in physical, digital, or dematerialized form. Once purchased in physical form, investors can make a specific request for crediting these bonds to their demat accounts. RBI then processes the dematerialization at their end and till the bonds aren’t within the books of RBI.
• Dematerialization can also be done after allotment. Investors who are not buying directly from RBI can purchase units from the secondary market i.e. stock exchanges.

Note: Demat Account is short for dematerialization account and makes the process of holding investments like shares, bonds, government securities, Mutual Funds, Insurance, and ETFs easier, doing away with the hassles of physical handling and maintenance of paper shares and related documents.

How to apply for Sovereign Gold Bonds Issue?

The bonds will be sold by scheduled commercial banks (except small finance banks and payments banks), Stock Holding Corporation of India Limited (SHCIL), appointed post offices, and permitted stock exchanges i.e. NSE/BSE.

How to withdraw Sovereign Gold Bonds before maturity?

These gold bonds have a fixed period of 8 years. Although RBI offers premature withdrawals after the completion of 5 years from the date of issue. Then premature withdrawals are allowed on interest payment dates. This process is very convenient, as investors need to approach the concerned bank, post office, or agent one month before the interest payment date. They can partially withdraw their holdings (minimum quantity is one gram). The withdrawal amount is then directly credited to the bondholder’s account

 Eligible criteria

The following are eligible to invest.

• You must be a resident of India.
• Your  Corporates or Companies registered in India.
• You must be a  HUFs or Partnership Firms
• You must have an identification document such as PAN or TAN, an Aadhaar card, Passport, or Voter ID card.
• A minor can also invest but an application is made on behalf of the minor by his/her guardian.

Non-Resident Indians (NRIs) are not eligible to apply.

Benefits of Investing in SGBs

• SGB ​​is a good option for investors who want to buy gold for investment purposes only. SGBs make sure that the quality of gold is safe and investors are protected from risk.
• They are also able to save on the cost of storing physical gold as these bonds are in digital form and are kept in the demat account of the investor.
• The 2.5% interest makes this option attractive because, unlike physical gold, investors earn idle income on their gold, which gets deposited directly into bondholders’ accounts.
• These bonds make good market-linked gifts.
• The capital gains on the maturity amount of these bonds are completely tax-free which makes them attractive for long-term investors.

Risks Involved in Buying SGBs

• There is a risk of loss if the market price of gold falls below its cost price. This is not a specific risk with the SGB form of gold investment but applies to the normal form of investment as well. Although, RBI has assured that the investor will not at all lose in terms of the quantity of gold allotted.

Sovereign Gold Bond Vs Physical Gold

• Attachment to physical gold: Many experts believe that Indians have a preference for physical gold because they give it affectionate value. Gold is primarily the first priority for investment in a India. SGB, although, is a virtual gold investment finance by a bank and earns simple interest of 2.5 percent. Interest is paid in 6 months and is taxable.
• No storage cost: Many Indians keep their gold at home or in the lockers of banks, which means there is a storage cost involved. But there is no such extra cost involved in SGB, which makes it a better investment option.
• Purity is not a concern: One of the major concerns when buying physical gold is the risk of getting the metal of low purity, mainly when the units are not hallmark certified. But for SGB investors do not face such concerns.
• Demat account requirement: You do not need a demat account to buy digital gold, but having one makes it easy to get returns. Gold units are allotted on the basis of investment amount and these units are credited in demat account. In case you do not have a demat account, bonds can be issued physically and also in the form of e-certificates.
• Taxation: The interest earned is taxable as per the income slab of the investor. But if you sell the SGB after eight years (fixed period), then the entire capital gain will be exempt. Thus, for all practical purposes, physical gold is an investment with slow growth.

Effect of Ukraine and Russia Conflict on Sovereign Gold Bond 

The conflict between Ukraine and Russia is continuing and influencing the gold markets. Globally, gold rates increased to around $1925/oz recently in the Comex gold futures. Meanwhile, the RBI, on behalf of the Indian government has opened the sovereign gold bond (SGB) scheme, which will be closed on March 4, 2022. Due to the Russia-Ukraine geopolitical tensions, gold rates have now reached around an 18-month high range in India